BPOPF, CMB fight over P830 million

Civil servants and pensioners may be fleeced of almost P1 billion over an questionable investment made by Botswana Public Officers Pension Fund (BPOPF) through one of its private equity porfolio asset managers in November 2014, The Patriot on Sunday can reveal. Sources at Government enclave have revealed a transaction that chronicles poor investment decisions, risky exposure and a partnership gone awry after the multi-billion pula BPOPF gave the asset manager P830 million as investment funds. An investigation of that investment, made in the form of a private equity fund -known as the Botswana Opportunity Partnership (BOP)- set up by local asset management firm Capital Management Botswana (CMB) has uncovered numerous breaches and violations to terms of the partnership. Nothwithstanding the alleged breaches by CMB, legal experts warn that it is near impossible for BPOPF to reprimand the asset manager, recover the millions or terminate the partnership without huge losses. In a curious turn of events, a report of the investigation which uncovered breaches that expose BPOPF investment to huge risk has divided the board of trustees and strained relations between management and the board. Impeccable sources within the public service indicate that the Chief executive Officer Boitumelo Molefe has been dragged into the controversial deal which was concluded before she joined BPOPF. Now, some trustees are using the CMB mess to exert pressure on Molefe in an attempt to push her out and cover up irregularities in the management of the multi-million pula transaction. BPOPF board chairman Carter Morupisi declined to field questions about his organisation on the dispute between them and CMB. Drawing an analogy from a marriage contract, Morupisi said: "We are bound by confidentiality of parties not to divulge information to third parties. I cannot respond to your questions, lest I end up in trouble". For his part CMB Chief Executive Officer Rapula Okaile was shocked to learn than BPOPF has been carrying out an investigation on their investments in BOP. He said they have never received formal communication from the pension fund and therefore are not aware of any concerns over the private equity fund. "They never came to us with any issue. So we are in the dark," said Okaile, claiming that he was learning about the matter for the first time from our enquiry. Okaile refused to say if according to CMB they are enjoying a cordial relationship in the private equity partnership with BPOPF. His biggest concern was how The Patriot on Sunday got wind of internal issues, suspicious that it was shared by the pension fund. He would not even respond to specific questions about CMB's alleged breaches and violations of the contract among them failure to account, unauthorised investments, refusal to submit valuations, no audits, excess cash in SA banks and conflict of interest.

The biggest dilemma causing BPOPF management and the board sleepless nights is that although the fund has committed capital of P830 million into the private equity partnership, "it will be impossible in terms of the partnership agreement to stop future drawdowns". Consequently, investigators and legal experts advise BPOPF that at this stage a termination is not recommended unless CMB continues with the breaches. "It is strongly recommended that BPOPF undertake an independent valuation at the cost of BOP as the external auditors have declared a disputed valuation. This will allow BPOPF to be able to assess the extent of the non-compliance, correct the valuations and also assess the excess cash to be returned. It will also enable BPOPF to assist the Investment department in setting up more robust internal compliance processes for monitoring purposes," part of the investigations report reads. Private equity is capital that is not noted on a public exchange. It is composed of funds and investors that directly invest in private companies or that engage in buyouts of public companies resulting in the delisting of the public entity. Private equity agreements are partnerships that give the General Partner (GP) absolute discretion. Under the arrangement, the Limited Partner (LP) is expecting a certain targeted return on exit of the investment. For the Limited Partner to disengage from such contract with remedies, they must prove wilful default and/or gross negligence. Calls for transparency in the private equity industry have been on the increase due largely to the amount of income, earnings and sky high salaries. Starting in 2016 some states in the USA have pushed for legislation to allow investors to look into the workings of private equity firms, by removing the secrecy that surrounds the transactions.

CMB are the Fund Manager and General Partner (GP) in the private equity portfolio, while BPOPF is the Limited Partner (LP). From late 2016, the latter noted several issues with BOP that needed to be resolved as soon as possible. One of CMB's role in the partnership is to perform quarterly and monthly valuations. From inception quarterly and annual valuations were not being done in the usual manner as most of the assets were recent acquisitions. The valuations were assumed to be the acquisition prices as noted in the drawdown notices. However at the March 2017 year end, it was necessary that CMB values assets using IPEV Guidelines as stated in the contract but they resisted and insisted on using the acquisition costs only as "nothing major had changed". BPOPF and external auditors disputed that position and sought an independent valuation. An independent expert Imara was selected to carry out the valuation but CMB refused them access to the investments. After a protracted standoff, BPOPF allowed CMB to submit a valuation with evidence of an independent review. The valuation that was eventually submitted four months later was not acceptable and the auditors rejected it. Further, there was no evidence of an independent review by the BOP external auditors. Investigators and legal opinion provided to BPOPF was therefore, that the pension fund has unlimited access to the BOP assets and are entitled to meet directly with the private equity fund auditors. BPOPF has also been advised that disputed valuations may be referred to an independent expert whose findings will be compared to those submitted by CMB. The report by investigators also reveals that no formal quarterly and annual valuation reports were submitted for reporting purposes, as per the partnership agreement and the AMS agreement. The violation of these reporting requirements led to investigators concluding that CMB had defaulted and breached the agreements.

The original agreements between BPOPF and CMB clearly stated that Grant Thornton was to be appointed as the BOP's external auditors. However, it was not until the first quarter of 2017 when the anomaly of Grant Thornton not being formally appointed was raised that it came to BPOPF's attention that in fact the company had been accountants of the BOP in the valuation period. Therefore, if Grant Thornton were to double as auditors it would create a conflict of interest. Once again CMB was deemed by legal experts to be in default of its obligations under the partnership agreement by not appointing Grant Thornton as auditors for BOP from inception. "By having them included in the initial contracts BPOPF had consented to Grant Thornton's appointment. Even though CMB has a wide discretion on the appointment of advisors, the appointment of Grant Thornton to fill both roles would be ill-advised and negligent," the legal opinion reads. Investigators on the other hand, advise that if the finding is correct a different external auditor will need to be appointed for BOP and a contract amendment made. They observed that while it is only CMB who can appoint or remove the external auditor due to sweeping powers in the partnership, BPOPF has the right to approve the appointment after ensuring that there are no conflicts.

Although the BOP is a local private equity fund whose capital is not to be noted on a public exchange, CMB was found to have invested in Wilderness Safaris by informing BPOPF that the company was about to delist. It was further discovered that cash from the transaction had been banked in South Africa to enable further purchases from the Johannesburg Stock Exchange (JSE), despite that the mandate is a local one. Wilderness Safaris and Botswana Stock Exchange (BSE), where Wilderness Holdings is listed denied the de-listing claim. Thapelo Moribame, BSE Market Development Manager, said on Tuesday that they are not aware of any intention to delist by any of their listed companies, let alone Wilderness.vWilderness Holdings Limited, a company linked to President Ian Khama through his shareholding in its subsidiary, listed on the Botswana Stock Exchange and Johannesburg Stock Exchange’s Africa Board in 2010. Wilderness owns and operates more than 60 luxury safari camps in nine African countries, mainly marketed and operated under the Wilderness Safaris and Wilderness Collection brands. In most countries, the camps are serviced by Wilderness Air, a company which recently pulled out of a controversial acquisition of national airliner -Air Botswana- after a leaked memo revealed how Khama pressured and instructed cabinet to approve the takeover. BPOPF's finding is that investments in listed securities is not part of the mandate of the GP's investment committee and/ or the investment policy but could not influence its decisions as CMB has all the control over investments. The only way for BPOPF to have assurance that the investment of the private equity fund is adhered to is to amend the mandate of the investement committee or the investment policy. CMB was also found to have invested BPOPF local private equity funds with Kawena Investments, which is not a local company. Online searches for Kawena shows that the South African based company's core business is Financial Services and Investments in the region, particularly in Mozambique. It is part of a large group of companies in different sectors. CMB has also invested in Makuba airlines, who were paid for with capital that was not drawn down for that specific purpose. According to Business Traveller Africa, Makuba is an airline set up by Zambian expatriates and locals in 2013 competing with Proflight, the only airline then providing flights within Zambia. The plan was that the airline be operational before the United Nations World Tourism Organisation general assembly, co-hosted by Zimbabwe and Zambia in August 2013. The two aeroplanes used initially include a Turbo Prop ATR 42-500 and an ATR 72-500, which were maintained by Air Botswana. The ATR 42 has a carrying capacity of 48, whilst the ATR can carry 72. Further, except for one, even the approved investments were found not registered in the name of BOP, which raises legal ownership issues.

According to the partnership CMB should drawdown only what they need for investment purposes, which must only be used for the approved investment and for no other purpose. In the initial valuation reported by CMB there was cash held in excess of P28 million, some in South African rands. The partnership agreement clearly sets out obligations of the GP to manage distributable cash. At some stage CMB purchased equity in Makuba airlines without a drawdown notice, and when questioned about the transaction they claimed that they had used cash that they held. Curiously, investigators found that there is no evidence of the existence of a BOP bank account where cash is held or for what reason it is held, which calls to question the accuracy of the drawdown notices. BPOPF is therefore clueles about the level of cash held in excess and the reasons. Only an independent valuation would help determine this.

BPOPF helpless

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Pensioners and other stakeholders will be shocked to learn that despite a trail of violations uncovered in the partnership with CMB, there is little BPOPF can do without the risk of losing out on the investment. This is particularly so given the discretion and latitude vested in CMB. For example, lawyers have warned that contrary to popular believe it is possible for a private equity transation to be structured around the acquisition of listed equities and that where CMB has discretion on investment decisions, proving wilful default and/ or gross negligence may prove problematic. It has also emerged that provisions of the partnership agreement protect CMB against being cited for breach or held liable for any act or omission if they demonstrate that they acted in good faith. These immunity clauses makes the remedies for the partners limited. For example, Clause 51.1 states that no covered person (defined as GP, the fund manager and its employees, etc) shall be liable to any partner for any act or omission if the covered person acted oin good faith and if the belief that such act or omission is in the best interest of the BOP. "It is therefore very easy to defend this position," the lawyers note. Another shocking discovery is that the partnership agreement between CMB and BPOPF does not have a clause on default or breach that directs that disputes be submitted to arbitration. This only leaves the use of common law in dispute resolution, which provides that one must give notice of breach and then a failure to remedy would entitle one to terminate the contract and claim damages. "The difficulty with this is that BPOPF will have a difficult time proving damages and even if it did, it would not be able to claim them because of the onerous clause 51.1 (cited above),” the lawyers warned.

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BPOPF, CMB links

BPOPF investment portfolio covers private equity, property, infrastructure, equity, fixed income and debt financing. As the fund for the largest employer in Botswana (the public service) BPOPF is by far the biggest in the country catering for civil servants, Botswana Defence Force (BDF), Botswana Police Service (BPS), Prison Services and local authorities among others. BPOPF controls over 80% of the market share, with assets worth around P60 billion invested in different sectors locally and offshore. Made up of 21 members, a Board of Trustees is the supreme body that manages the Fund. It comprises of nine employer (Government) trustees, nine employees trustees, one pensioner trustee, one independent trustee appointed by the board and the Principal Officer. The structure of the board is scheduled to be trimmed to just 11 trustees in April 2018, in compliance with the new Retirement Funds Act. The Board is currently chaired by Morupisi who is the Permanent Secretary to President (PSP), Secretary to Cabinet and former Director of Public Service Management (DPSM). The post will be up for grabs when a new trimmed down committee elects a new chairman at the end of the current financial year in March 2018. Already there is intense lobbying behind the scenes between government and employee trustees for his replacement.

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Carter Morupisi

Morupisi has refused to vacate the chairmanship despite being found to be conflicted by a forensic audit done by Non Bank Financial Institutions Regulatory Authority (NBFIRA) in terms of the Act and the Pensions and Provident Fund Act. Nexus Forensic Services of South Africa was engaged for the period August to December 2014 to investigate a range of BPOPF operations including governance, internal controls, and investments. Nexus observed that Morupisi is a public servant, in particular an employee of DPSM which is a recruitment department of government. Nexus concluded thus: "This seems to contravene the Fund Board Charter which requires that the chairman elected should be independent and free of conflict of interest on appointment. In addition, his appointment is a contravention of Principle 2.16 of King III code of corporate governance which requires the chairman to be an independent non-executive board member". The Board Charter defines independence as not a representative of a stakeholder who has the ability to control or significantly influence management and; does not have a direct or indirect interest in the fund. Morupisi took over the chairmanship of BPOPF from his then executive assistant at DPSM-Rapula Okaile in 2013 before ascending to PSP post. Okaile is the current Chief Executive Officer of CMB, one of the companies who signed asset management contracts with BPOPF in November 2014. Okaile reported for duty on March 01, 2015 as the CEO after serving a three months’ notice at DPSM where he was Assistant Director. When questioned by The Patriot on Sunday in 2015 Okaile flatly denied fronting for some senior government officials as alleged or that his company (CMB) could have benefitted from privileged information to win the BPOPF contract. “My chairmanship ended in April 2013, long before the new Investment Policy Statement (IPS) was discussed. Even when CMB tendered for the contract I was not part of them,” he said then. When it was put to him that he could have been privy to the goings-on at BPOPF since he was Morupisi’s executive assistant, Okaile said he only dealt with his boss on DPSM matters. “I was not privy to any other unrelated information,” said Okaile. He also dismissed as farfetched allegations that the decision to relocate BPOPF assets from offshore investment to invest locally in the private equity market and setting up an infrastructure fund as new investment projects, was taken when he was board chairman. “Nothing can be further from the truth,” he said.

Who is CMB?

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CMB entered the private equity market in November 2014 with P500 million assets managed on behalf of BPOPF. Soon thereafter they embarked on an ambitious roadshow searching the market to raise an extra P1.5 billion to hit a P2 billion target. They targeted other funds like the Motor Vehicle Accident Fund (MVAF), Debswana Pension Fund (DPF), Bramer Life (now BONA Life) and Flotek among others. Botswana Opportunity Partnership (BOP), now at the centre of the unfolding saga, was set up specifically to raise capital to drive the strategy with closure targeted for November 2015. At the time Okaile told this publication that “all companies we invest in have to be domiciled in Botswana, but with plans to expand into the region”. CMB is the latest version of BIFM Capital – a private equity subsidiary for Botswana Insurance Holdings Limited (BIHL), which was originally established in 2004. BIFM Capital was formed by BIHL and Capital Management Africa (CMA) – the holding company for CMB. In 2013 CMA left the partnership leading to transformation from BIFM Capital to CMB. BIFM Capital principal founders were Rhys Carr (South African) and Timothy Marsland (British), the same duo who currently hold 70% shareholding in CMB – an investment management company operating in private equity space domiciled in Botswana. They operate on a diversified portfolio covering manufacturing, information technology, education, water and energy sectors where they invest. In 2015, Okaile revealed that CMB founders were in the process of transferring 30% shareholding to local employees of the company being himself, the Finance and Administration Manager and the Business Analyst. The only other employee in the company at the time was a cleaner/ office assistant.

The Regulator

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The unravelling suspicious transactions at BOP will surely catch the attention of the regulator, NBFIRA, who patrols the billion pula pension fund industry like a hawk. The breaches and violations also vindicate findings by forensic experts appointed by NBFIRA in 2014 to investigate the operations of BPOPF. The forensic audit by Nexus revealed that "contrary to the Fund Rules, which state that the sole responsibility for the management of the fund shall be vested in the trustees, in some cases the Board of Trustees adopted a passive approach in discharging their role of identification, controlling and/ or mitigating the fund risks and containing the fund expenses".